Crashed
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One neuralgic point was the scale of PSI. The initial figure that had emerged from the polite negotiations with the IIF was only 20 percent. The bankers were not permitted in the intergovernmental meetings on July 21. But they gathered in the corridors outside. When the governments let it be known that 20 percent was insufficient, the IIF offered 21 percent. With this symbolic concession there was general satisfaction that a deal had been done. No one did the math. It was a matter of gestures, not arithmetic. When the IMF’s representative queried Greece’s sustainability under the assumption of such a modest restructuring, the meeting was treated to a “furious denunciation” by Charles Dallara of the IIF.60 The indignation too was for show. In private Dallara was only too happy to boast of the astonishingly generous deal that his lobbying had secured for his clients, the big banks.61
The result of this compromise was that Greece would pay the reputational price for having restructured its debts, but it would gain precious little financial relief. It would be left carrying a debt burden of 143 percent of GDP, which was clearly unsustainable. As one Goldman Sachs analyst commented: “This tendency to ‘under-size’ otherwise good policy initiatives has been a recurrent feature of European policies.” A member of the UBS economics team was less polite: “This is fiddling around at the margins. . . . The debt needs to halve.” As to the new support facilities provided by the EFSF, Willem Buiter, chief economist at Citigroup, told Bloomberg Television, “The European Financial Stability Facility has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo. . . . It needs to be increased in size urgently.”62 If Italy went critical, the EFSF would need not 200–400 billion but 1–2 trillion euros. Otherwise, only the ECB, with its bottomless supply of euros, could backstop the system.
In the meantime, investors were on edge. At the end of July it emerged that Deutsche Bank had cut its holdings of Italian debt by 88 percent since the beginning of the year.63 For Italians in Berlusconi’s camp it was a clear case of blackmail. In the circles around Finance Minister Tremonti there was talk of a stab in the back.64 Earlier in the year Rome had had the temerity to suggest that any joint European bailout fund ought to be funded in proportion not to GDP but to the size of bank claims that were being rescued. Not surprisingly, this was not a popular idea in Berlin. Tremonti was convinced that the precipitate sales by Deutsche were a message from Merkel and Schäuble. Whatever the truth of the matter, the suspicion was symptomatic. Trust was breaking down.
V
If money was fleeing out of Europe, where was it to go? The answer since the onset of the financial crisis had been, paradoxically, the United States. As US subprime went bad, there had not been the panicked dollar sell-off that many had feared. Instead, investors shifted into US Treasurys, the very top of the global monetary pyramid. In 2008 the dollar surged and US interest rates fell. Successive waves of QE reversed that trend. The dollar slid against its major trading partners. This imposed losses on investors and made US bonds marginally less attractive. By the summer of 2011, however, something far more ominous was on the horizon.
At the start of the year, as the new Republican majority in Congress flexed its muscles, the effort to craft a bipartisan, long-term approach to fiscal consolidation broke down.65 For want of a budget, in April 2011 the US federal government already came close to a shutdown. On May 16 the permissible ceiling of federal debt was reached, at $14.3 trillion. With tax revenue covering only 60 percent of current spending, Washington had hit the limit of its legal right to borrow. The Treasury was forced to adopt “extraordinary measures,” including borrowing from government cash reserves and selling assets from the civil service retirement fund.66 This would see the Treasury through until August 2. After that, the US federal government would face a choice between paying salaries or paying its creditors. America was sliding toward something even worse than concerted austerity, a chaotic shutdown risking default on its obligations to both domestic and foreign creditors.
In late July 2011, as Sarkozy, Merkel and Trichet diced with the future of the eurozone, the United States was perilously close to the edge. There was no longer any disagreement in Washington about the need for urgent fiscal consolidation.67 But there was a huge divide between Democrats insisting on a balanced approach to deficit reduction, involving tax increases as well as entitlement cuts, and Republicans focused exclusively on spending reductions. The Speaker of the House, John Boehner, was looking to assert his control over the Tea Party faction by striking a deal with the White House to achieve deficit cuts of $4 trillion over ten years. But on July 22 the talks between Boehner and the Obama administration broke down over Republican demands for slashing reductions in medical spending and the White House insistence on a $1.2 trillion increase in taxes.68 Journalists began compiling calendars as to which bills due in August the American government should pay first. Constitutional specialists were debating the pros and cons of executive prerogative, or coining trillion-dollar platinum coins with which to repay the national debt.69 If Greece was a problem, and Italy was too big to fail, there was simply no reckoning what a US default might do. In August alone, the Treasury had to roll over almost $500 billion in debt.70 With the eurozone wobbling, the American money market funds that were pulling out of European bank bonds continued to shift into US Treasurys. But appearances were deceptive. Investor demand for US government debt held up, but above all in lower-risk, short maturities. The average maturity of US Treasurys held by the MMFs declined from ninety-five days in January 2010 to only seventy days at the end of July 2011.71 Meanwhile, financial engineers began to contemplate the need for something no one had contemplated before—credit default swaps against US Treasurys.72
Prior to 2008 the market for US Treasury CDS had not existed. What would have been the point of insuring the risk-free asset class on which the entire global financial system rested? In the wildly improbable event of a US default, the general destabilization would be such that it was unclear whether any private financial entity would still be in a position to act as a reliable counterparty. Who would be left standing to pay out on insurance against the end of the world? Nevertheless, having first come into existence during the turmoil of 2008, when it seemed that Fannie Mae and Freddie Mac might fail, in the course of 2011 the niche market for CDS on US Treasurys sprang back into life. In the last days of July just over a thousand contracts were outstanding, with spreads running to 82 basis points. It was a fraction of what investors in Greek debt paid, but it was astonishing that the market existed at all.
On July 31, 2011, Washington pulled back from the abyss. A budget compromise was reached that would impose automatic austerity if the two warring parties could not agree on cuts by the end of the year. Reluctantly, sufficient Tea Party radicals were won over to the Republican leadership’s position for the deal to go through. It took heavy lobbying and hours of alarmist lectures by credit-rating experts and former officials from the Bush administration to convince the Republican insurgents of the dramatic consequences of a default. But the damage was done. As Mitch McConnell, the Republicans’ leader in the Senate, blithely informed the media: “I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn’t think that. What we did learn is this—it’s a hostage worth ransoming.”73 As Jason Chaffetz, one of the hard-line Tea Party newcomers, remarked, the threat had been real. “We weren’t kidding around. . . . We would have taken it down.”74
On August 3 China’s Dagong ratings agency was the first to draw the obvious conclusion. It downgraded the United States from A+ to A. As Dagong remarked: “[A]t this crucial juncture, neither the Democratic Party nor Republican Party has shown any consideration for the general interest in order to argue for their own partisan interest; they had a hard time making the correct choice in a timely manner leaving the world in terror, which highlights the negative role of the US political system on an economic basis.”75 The US politic
al system, the Chinese analysts concluded, “cannot resolve the fundamental influence of low economic growth, high deficit and increasingly higher debt to the debt service capability through increasing real wealth creation, with the declining national solvency irreversible. It is natural that QE3 monetary policy will be enabled for the next step, which will throw the world economy into an overall crisis; the status of [the] US dollar will be essentially shaken in this process.” This was the judgment of the G20 at Seoul turned into the language of credit rating. The year ended with a big sell-off of US government debt by Beijing. But there was no rout. The long buildup of Chinese claims on the US taxpayer had ended. But the portfolio stabilized at between $1.2 trillion and $1.3 trillion.
Criticism from China was only to be expected. More surprising was the fallout at home. On August 5 the unthinkable happened. One of America’s own ratings agencies, Standard & Poor’s, downgraded the United States from AAA to AA+. S&P cited the “political brinkmanship of recent months” and the mounting evidence that “America’s governance and policymaking” was “becoming less stable, less effective, and less predictable.”76 It also pointed to the supposedly unsustainable level of US debt and the speed of its accumulation, which would take it well over 90 percent of GDP by 2021—the notorious Reinhart and Rogoff threshold. But when the US Treasury was handed the explanation for S&P’s decision, it became clear that the ratings agency had committed an elementary mistake. By applying the figures for debt growth to the wrong benchmark scenario, it had wildly overstated the deficit to be expected over the next ten years. Even more surprisingly, when this error was pointed out, S&P did not retreat. It left the downgrade in place as well as the explanatory text—minus the modeling error. This led the Treasury to fire off an official denunciation. “S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one. . . . The magnitude of this mistake—and the haste with which S&P changed its principal rationale for action . . . raise fundamental questions about the credibility and integrity of S&P’s ratings action.”77 No one doubted the weakness of the US political system. But S&P had delivered just one more demonstration of how broken the ratings agencies were. It was their AAA certifications, handed out to hundreds of billions of subprime MBS, that had helped to precipitate the crisis in 2008. It was their serial downgrades that were setting the pace of the crisis in the eurozone. But it turned out that they could not even get their sums right on the US budget.
VI
Trillions of dollars of debt were losing their status as safe assets. The US Treasury was accused by the German finance minister of interventionist tendencies akin to communism. NATO was squabbling over Libya. The loose monetary policy of the Federal Reserve was blamed for fomenting revolt in the Middle East. The EU was locked into a self-deceptive nonsolution to the Greek debt crisis, and when it was not engaged in extend-and-pretend it was openly and unabashedly lying. Both Italy’s prime minister and the managing director of the IMF were up on sex charges. Washington was willfully toying with bankruptcy. The ratings agencies could not do their arithmetic. Millions of people were in the streets, protesting, demanding a “rupture,” unable or unwilling to pay debts they had contracted or that had been contracted in their name.
Over the weekend of August 6–7, as the world digested the downgrade of America’s sovereign debt, heads of government, central bankers and Treasury officials interrupted their summer vacations for a frantic round of telephone conferences. But all that emerged were lame communiqués, which did nothing to inspire confidence. On Monday, August 8, rocked by bad news from both sides of the Atlantic, stock markets sold off sharply. President Obama was left to remark: “We now live in a global economy where everything is interconnected, and that means that when you have problems in Europe and in Spain and in Italy and in Greece, those problems wash over into our shores.”78
In the general crisis of legitimacy in 2010–2011 there was no Archimedean point. There was no place to stand above the fray. Bringing this home was the point of the protesters “getting in the face” of government officials in Spain and Italy. They wanted to break through the invincible authority and distance that separated decision makers from those their decisions impinged upon, to force them to come face-to-face with a different reality. And over the summer of 2011 a small band of US activists determined to do the same at the hub of the world financial economy in New York.
On August 19, 2011, representatives of the New York Stock Exchange met with agents of the FBI for an unusual conference.79 Trawling the Internet for suspicious activity, the FBI had got wind of an “anarchist” network dubbed “Occupy Wall Street.” Its aim was to spread the protest movement that had gained such scale in Europe to the United States. The occupation of Zuccotti Park right next to Wall Street was scheduled for September 17. The US media at first ignored the story. The first to cover it were Agence France-Presse and the Guardian.80 But within weeks the tiny encampment that lodged itself within hailing distance of Wall Street would become headline news around the world.81
Given the scale of the social media storm it unleashed, it is important to put Occupy Wall Street in perspective. It was tiny compared with the gigantic antiausterity mobilizations in Europe. The global Occupy demonstrations that took place on October 15, 2011, attracted perhaps as many as a million demonstrators in Spain, 200,000 to 400,000 in Rome, tens of thousands in Portugal. In New York between 35,000 and 50,000 protesters marched. But the New York occupation had a symbolic significance far in excess of its modest scale. It articulated radical opposition at the very heart of US capitalism. Imitation camps sprang up across the United States, in Philadelphia, Oakland, Boston, Seattle, Atlanta, L.A., Denver, Tucson, New Orleans, Salt Lake City and many other cities. Further afield there were notable solidarity camps in London, Seoul, Rome, Manila, Berlin, Mumbai, Amsterdam, Paris and Hong Kong. Estimates vary, but protesters in at least nine hundred cities around the world staged sympathy demonstrations.82 Across the United States, wherever they sprouted, the Occupy camps could expect the watchful presence of the FBI and even US counterterrorism authorities. But despite their tiny size and ramshackle appearance, the obvious and unsettling fact was that the anger of the radical minority was shared by a wide swath of US public opinion.
In October 2011 a poll conducted for the New York Times and CBS News found that almost half those questioned felt that the FBI’s “anarchist camp” reflected the views of most Americans.83 Two-thirds thought wealth should be distributed more evenly—nine out of ten Democrats, two thirds of Independents and even one third of Republicans agreeing with that sentiment. But only 11 percent of Americans trusted their government to do the right thing, 84 percent disapproved of the Congress that had threatened to bring the US federal government to its knees and 74 percent thought their country was on the wrong track. Since January 2009 the Obama administration had been straining every muscle to put the lid on popular discontent. Rather than seeking to mobilize the indignation simmering in American society, it had found one technocratic fix after another. Two years later the result was a spectacular delegitimization from both the Left and the Right.
Chapter 17
DOOM LOOP
On September 1, 2011, Pedro Passos Coelho, Portugal’s new prime minister, made his first visit to Berlin. His host, Chancellor Merkel, began the joint press conference by announcing how pleased she was to hear that the troika had just submitted its first report on Portugal’s structural adjustment program and had declared itself satisfied with the progress being made. She was delighted also to hear that Coelho saw no obstacle to incorporating a German-style debt brake into Portugal’s constitution. Then, in the question-and-answer session that followed, it seemed that Chancellor Merkel let the cat out of the bag. Asked about the question of parliamentary control over the European Financial Stability Facility, recently mandated by the German constitutional court, Merkel deadpanned:
“We do live in a democracy and we are pleased about that. It is a parliamentary democracy. That means that the budget is a key prerogative of parliament. Thus we will find ways to organize parliamentary codetermination in such a way that it is nevertheless market conforming, so that the appropriate signals appear in the markets. I hear from our budget specialists that they are conscious of this responsibility.”1
Market-conforming codetermination—was this what European democracy had been reduced to by the autumn of 2011? Was this the hidden agenda of the troika programs, imposed not only on the parliaments of Greece, Ireland and Portugal but on the Bundestag as well—to make them market conforming? For many who joined the protests of 2011, Merkel’s words confirmed their jaundiced view of the EU as little more than a container for the rule of the markets, or that new buzzword of the crisis, “neoliberalism.”2 Merkel did little to clarify the situation. On September 22, a few days ahead of the IMF meeting in Washington, she welcomed the first German pope, Benedict XVI, to the chancellery. Quizzed by curious journalists, Merkel volunteered that the European crisis had been at the heart of their conversation: “We spoke about the financial markets and the fact that politicians should have the power to make policy for the people, and not be driven by the markets. . . . This is a very, very big task in today’s time of globalization.”3
In their flailing generality, these statements are symptomatic of the depth of the crisis by the autumn of 2011. In the space of barely three weeks, the German chancellor managed to tell the press that politicians should be responsible to markets and to tell the pope that politicians should make policy for “the people” regardless of those markets. Was it a contradiction? Or was she implying some kind of synthesis? If so, was it a matter of finding the market-conforming mode of expression that would allow politicians to slyly exert their power or, more ominously, a matter of hammering democracy into such conformity that no market ever need fear the policy parliament might make? Did anyone in Berlin know? No surprise that Gregor Gysi, the sharp-tongued spokesman of Die Linke, should lash Merkel’s handling of the eurozone crisis as an engine of chaos and confusion.4